What Is Customer Lifetime Value, and Why’s It Important?

The best kind of customer is a repeat customer.

They’re so great that marketers have created an entire system for measuring, acquiring, and maintaining them. Why are they so great?

Here’s a clue: getting a new customer is 6-7 times more expensive than keeping an existing one. This article will look more deeply into customer lifetime value and why marketers value it so highly.

What Is Customer Lifetime Value?

Customer Lifetime Value (CLV) measures how much revenue a business can realistically expect from a single customer over time. CLV evaluates the revenue value of a customer in relation to their predicted customer lifespan.

customer lifetime value

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Note that a customer lifespan is not the same as a traditional lifespan. For example, a SaaS company does not expect to serve a customer their entire life. Instead, they will serve them for as long as their product is relevant to the customer’s needs. This can be months, years, or even decades.

Keep in mind that there are multiple definitions of CLV, varying primarily on complexity. For example, some companies may factor in every expense of their customer journey, while others only factor in basic costs.

We’ll only use net revenue throughout this article for simplicity’s sake.

How to Calculate Customer Lifetime Value

Here’s the core formula for calculating customer lifetime value:

CLV = average order value X average amount of purchases the customer makes each year X average relationship length with customers (in years)

Let’s give an example. Imagine you have a football boot store, and you’re trying to determine the CLV of a semi-pro player who visits often.

$250 per pair of boots X two pairs per year X six years = ((250)2)6 = $3,000 CLV

Keep in mind this is a rough formula that can become infinitely more complex. For example, you could factor in marketing, rent, and any other expense involved in selling the boots and calculate a gross CLV.

Why Is Customer Lifetime Value Important?

Customer Lifetime Value is essential for several reasons:

1. Determining How Much to Invest in a Customer

Ultimately, CLV is a metric for how much you should be willing to invest in maintaining a given customer relationship.

For instance, a big SaaS company like Ahrefs will invest tremendous time and effort in single customers because of their high CLV. A good customer experience can result in decades-long clients worth tens of thousands of dollars.

Conversely, a bargain store will invest the bare minimum in maintaining customer relationships. That’s because a bargain store will have low margins resulting in meager CLVs (relatively speaking).

2. Determining Which Customers to Target

When you know the average value of a customer over their lifetime, you know the high end of the spectrum too.

customer lifetime value

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Let’s go back to the boot shop we discussed above. Imagine that when determining your CLV, you noticed that customers buying Adidas boots spent 50% more than those buying Nike.
With that information, you know you should target Adidas customers.

For example, you might put up Adidas posters in the windows, put an Adidas stand at the entrance, or advertise your Adidas stock online.

Whatever you choose, you’ll invariably score higher CLVs by targeting the most valuable sorts of customers.

3. Identifying Customer Retention Issues

Perhaps when calculating your CLV, you notice that it’s low compared to your industry and product margins. If so, congratulations: you might have just saved your business.

Customer retention issues will snowball into massive problems for your company. Unfortunately, new businesses often make the mistake of ignoring it, thinking it will go away on its own as the business grows.

Unfortunately, that couldn’t be further from the truth. Consistent customer retention rates (and the CLVs accompanying them) never happen by accident.

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How to Increase Customer Lifetime Value

Even if your business enjoys high CLV, there’s always room for improvement. This section will discuss the best ways to boost CLV quickly.

1. Streamline Your Onboarding Process

Onboarding customers is the process of introducing them to your brand. It’s about showing what you do, why it matters, and what makes it unique.
A customer’s first interaction with you starts a potentially life-long relationship. Whether it begins with a website landing page or walking into a store depends on your unique situation.
However it happens, it’s up to you to make the most of it. An effective onboarding process is the foundation of high CLVs.

2. Increase Average Order Value

Making orders more valuable is a guaranteed method of increasing CLV.
The most straightforward way of accomplishing this is by increasing the price outright. However, this can easily backfire as customers buy competing products at a better price.

Instead, use more subtle tactics to persuade your customers to place larger orders — like upselling.

For example, most fast-food restaurants will offer a combo. While these combos are more expensive than a single entree, they provide better value by giving more food for the money. That perceived difference in value will cause the customer to make a larger purchase of their own volition.

3. Improve Overall Customer Experience

Customer experience consists of every interaction between a customer and a company.
These interactions include website visits, store visits, advertising exposure, customer support, etc. Everything up to, including, and following a purchase is part of the customer experience.

If you’re serious about maximizing your CLV, you must ensure every aspect of your customer experience is the best it can be. It only takes one bad interaction to lose a customer forever.

4. Receive and Evaluate Customer Feedback

Nobody knows your customer experience better than your customers. Therefore, it’s essential to capture and manage feedback effectively. Brands that ignore customer feedback tend to suffer low

CLVs and perform poorly in the long run. The easiest way to capture valuable feedback is with customer satisfaction surveys. Surveys like Nicereply’s are simple to set up and integrate anywhere within your customer interactions.nicereply

Conclusion

It’s an old cliche for grouchy customers to reference how long they’ve been a brand’s customer when making a complaint. But, as annoying as cranky customers can be, they have a point: life-long customers can make or break a business. Case in point: returning customers spend 67% more than new ones.

In addition, Customer Lifetime Value is a metric that has the potential to transform your customer experience. When you work to improve CLV, you’ll inevitably find many ways to improve your overall brand. You can only win, so get on it today!


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Samuel Szuchan Samuel Szuchan

Samuel Szuchan is the founder of SamSzu.com, where entrepreneurs are learning to scale their businesses like never before. His experience in the e-commerce industry derives from his previous ventures and his current entrepreneurial pursuits. When he’s not teaching online business to others, he can be found entranced by a new book. See his latest posts on LinkedIn or Twitter.

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